The Financial Meltdown was Avoidable – What is Capitalism?

In a recent blog, I tried to give an overview of what happened and why it happened. In writing that blog, it occurred to me that the subject of how to avoid future similar meltdowns is about as confused in the public’s minds as to the reasons why the meltdown occurred.

If you Understand Why a Cycle Occurs, it is not too Difficult to Prevent Future Similar Occurrences. Why don’t we do it?
Essentially our capitalist system is severely flawed. I say this in spite of the fact that I believe that I am a capitalist. I wish to succeed or fail on my own merits and as a result of my own efforts. I feel that society is there for a safety net, and to provide a level and fair playing field for members of society, as well as providing for the less fortunate members of society. But success or failure, with many exceptions, should depend on the individual, not on society.

I feel I am a capitalist. I also feel that we don’t have a capitalistic system. We have a system that robs the middle class in favor of those with the power of the financial tools. Our system is a farce in many ways.

Human Greed
I don’t feel that society should be twisted out of shape in order to confuse and obstruct fairness, and I most certainly don’t agree that the privileged should be allowed by their position to take away the hard earned earnings of the working and productive population. That is not capitalism. That is human greed working in its most destructive manner.

What is Capitalism
In its essence, capitalism is the ability of the private sector to raise money and invest that money in the private sector. It is a method, supposedly a very efficient method, whereby people that need money can acquire money through the efforts of the private sector.

If one understands what is happening, and takes the time to understand just how twisted out of shape our financial system is, then one can start putting mechanisms in place to avoid the great pain that the average person is currently enduring because of the end of the latest cycle.

The Main Elements that are Wrong with our Economic System
I will divide my comments into parts, and will comment in due course on each of the parts. One blog is too brief to comment on all.

If the reader can stand away and look at the system from a distance, it becomes much clearer. I hope to provide some of that clarity by discussing the following points.

I will call these points MY CHECKLIST, and will refer to the number of these items in this checklist in future blogs.

1. Understand the difference between a) the financial system and b) the manufacturer of cars or appliances. They are treated differently, and wrongly so.

2. The Lack of Warranty attached to Financial Investments. Buying a car means whoever sold you the car, stands behind the car. The financial system works on the opposite principle. Buyer beware!

3. The Commission Incentive for humans to cheat other humans. If you get paid only on what you sell, and the moment it leaves your shop, there is no incentive to stand behind anything, there is something very wrong. We wouldn’t accept this on an electric can opener sold to us. But we do accept it as OK on our money and on our savings.

4. The failure to properly use our Income Tax system to ensure that society works the way it should. Excess profits encourage misdeeds and a loss of morality. The tax system is used to promote scientific research, or to plant corn that wouldn’t otherwise be planted. But the income tax system ignores the most important industry of all.

5. Separation of the Four Pillars of the financial system. Because of the destructive nature of human greed, long ago our law makers separated the four main parts of the financial industry. They realized that human greed could run amuk, as indeed it has run amuk. In the misguided urgency to eliminate needless laws and regulations initiated by Ronald Reagan, we have removed logical and necessary boundaries that protect society. We have forgotten what basic human emotions will do.

6. The duties of persons leaving the private or the public sector for the other sector. There seems to be no understanding of the difference between making as much money as possible for oneself, and the selflessness of serving in the public realm. The definition of when a person can shift from one sector to the other, and the obligations of a person to the sector he/she is leaving have escaped us. The result is bad policy that protects the status quo.

7. Self-Insurance could be accomplished by a small portion of the profits always directed to a fund. Profits that are excessive to any reasonable criteria should also carry the obligation to self-insure against errors and problems.

8. Understanding internal oversight as compared to external auditors. We rely on public auditors who charge enormous rates varying from $500 to $1,000 per hour. They are an enormous bureaucracy with a monopoly on their services. Yet they fail to understand what they are auditing more often than not. It is the classic story of missing the forest for the trees. It is also a story of auditing a part and ignoring the whole.

9. Tax havens are respected. Terrorists are not. It is inconceivable to me that we allow persons and companies to make profits within our borders, and yet use supposedly legal means to avoid paying their share of income tax on those profits. This is an immoral drain on our society, yet it is politely respected. Yet terrorists who kill or threaten a few people are hunted down with ferocity. If someone is boldly robbing our society day after day, and hurting millions of people, they are terrorists also.

10. The Power of Simplicity as compared to being overwhelmed by information. The do-gooders believe in full disclosure. What a farce! When one reads a financial instrument, one must read hundreds of pages of legaleez that is incomprehensible. That very disclosure obscures and conceals the truth. Why do we allow this?

In blogs to follow, I will discuss each of these mentioned issues. I apologize for writing on such dreary subjects, but these subjects seem to be ignored by the world at large and are hurting many of us so very much.